Too many companies see the company pension scheme only as an insurance product

The company pension scheme (bAV) is one of the most efficient instruments of modern compensation architecture. However, in practice it is still managed like an insurance product.

But with the Second Company Pension Strengthening Act (BRSG II), which came into force in January, and the EU Pay Transparency Directive, which Germany must have enacted into national law by June 7th, companies should finally close the gap in their company pension offerings.

There is still a common misconception that runs through German Comp & Ben practice: the bAV is managed as an insurance product, not as a compensation architecture. That sounds like semantics. But it is the crucial difference between an instrument that fulfills a duty and an instrument that creates an effect.

Because: An insurance product is taken out, processed and documented. A compensation architecture is designed, controlled and measured. This distinction is self-evident when it comes to executive compensation: Long-term incentive models (LTI models), deferred compensation and pension promises are considered an integral part of the total rewards logic. In contrast, the company’s workforce remains in a parallel world: outsourced to brokers, technically isolated from payroll, communicatively invisible. The result: Only 19 percent of employees in the private sector actively pay into a company pension plan via deferred compensation. In a country where the statutory pension is under structural pressure and the employer contribution has been mandatory since 2022, this is a fatal diagnosis.

What the architectural question means specifically

Anyone who thinks of company pension schemes as a compensation architecture asks specific questions. Not: What pension schemes do we have? But rather: What effect does our compensation mix achieve per euro invested, and where is the company pension scheme under- or over-dimensioned?

The logic is clear: according to Section 3 No. 63 EStG, a salary conversion is exempt from income tax up to eight percent of the contribution assessment limit and exempt from social security up to four percent. This results in an efficiency advantage compared to an equivalent gross salary increase, in the double-digit percentage range depending on the tax class and contribution amount. The legally obligatory employer subsidy of 15 percent on the saved social security contributions is not a cost factor, but rather a lever: If communicated well, it disproportionately increases the perceived value of the benefit.

What is crucial is that efficiency does not arise when the contract is concluded, but rather in the participation rate. A pension fund with 18 percent participation is economically a different product than one with 65 percent. This is where architecture comes into play. It shifts the KPI from the contract component to the impact size. The following questions arise:

• How high is the participation rate – by location, pay group and type of employment?
• How is the employer subsidy distributed across the workforce, and does this distribution correspond to the intention of the remuneration policy?
• What is the correlation between bAV participation and retention?
• What is the difference between the pension entitlements of full-time and part-time employees? Is this intentional?

These questions often cannot be answered because the data is fragmented and held by pension providers, brokers and HR. This is why 75 percent of companies see administrative manageability as the biggest challenge with company pension schemes.

BRSG II: regulatory reason to act now

With BRSG II, the legislature is postponing calibration in favor of distribution and comprehensibility. Three directions are particularly relevant:

• Expansion of the social partner model: The pure contribution model is opened up beyond the collective agreement. For the first time, companies without collective bargaining agreements have access to care models without guarantee promises – and thus to significantly better return expectations for employees. Anyone who ignores this will compare their classic pension scheme with models that are structurally superior in five years.
• Low-income support: The funding amount according to Section 100 EStG increases and the income limit is raised. For companies with a mixed workforce, this creates economic leverage to specifically set up low pay groups without putting a strain on the gross salary base.
• Optionssysteme (Opt-out): Collective bargaining agreement options for automatic inclusion with the right to object are being expanded. International experience shows that the default shift alone drastically increases participation rates. But anyone who switches to opt-out without preparing it communicatively and administratively risks loss of compliance and trust.

For Comp & Ben this means: supply organizations, which have often remained unchanged for years, should be adapted to the legal situation as quickly as possible.

Equal Pay: die Fairness-Dimension

There is a second axis that Comp & Ben can no longer ignore: the gender care gap. According to Eurostat, the gender pension gap in Germany is around 40 percent.

This number does not arise from the pension system, but from the remuneration history: part-time quotas, career breaks, lower pay levels. The company pension plan is not the cause, but rather a multiplier. The EU Pay Transparency Directive adds new reporting and justification requirements. Companies must disclose pay differences and initiate corrective mechanisms if the difference is five percent or more without objective justification.

Even if the directive is primarily aimed at basic remuneration, works councils, supervisory bodies and auditing bodies will focus their attention on total remuneration. This includes pension entitlements. A modern Comp & Ben strategy will therefore think of company pension schemes not only as a net efficiency instrument, but also as a compensation instrument:

• Differentiated employer subsidies for part-time workers who have poorer structural provisions,
• Communication standards for parental leave and sabbatical periods, in which company pension decisions are typically made with a lack of information,
• Pension regulations that do not implicitly punish career interruptions, for example through waiting periods or vesting rules, and which no longer fit into today’s working reality

Anyone who is unable to control this cannot actively lead the discussion but must explain it reactively.

What an architecture-oriented company pension plan achieves

The transition from insurance thinking to compensation architecture is reflected in three principles:

• Data sovereignty: Comp & Ben must be able to read company pension figures just as quickly as salary ranges or bonus quotas. Quarterly evaluations, location and function clustering, correlations with retention data – all of this should be standard in reporting.
• Communication logic: Participation is a function of understandability. 71 percent of employees do not understand the basics of their company pension plan. This is not an education problem, but a design problem. Onboarding integration, individualized calculation examples and self-service access are prerequisites for the economic architecture to be effective.
• Governance: The pension plan is not an insurance document, but a remuneration policy statement and is part of the regular marketability check as well as salary bands, benefit portfolio and short-term incentive structures (STI). This requires: Comp & Ben and CFO as a joint control authority instead of HR administration plus broker support.

The current question for Comp & Ben is not whether the company pension plan needs to be revised, but rather how it will be managed at the top or managed downstream.

The difference determines three things:

• Whether the company incorporates the tax and social security efficiency advantage of the BAV into the compensation balance sheet – or gives it away to unused deferred compensation,
• whether the pension plan according to BRSG II is treated as a structural decision or as a compliance update,
• whether the reporting is supported by a comprehensible remuneration architecture or by a gap in provision.

The company pension scheme is one of the least used instruments of modern compensation. The task is not to buy new products. The task is to finally use an existing instrument as it was designed: as architecture.